Sixel: Retiring can mean stunning health costs

Updated 1:21 pm, Thursday, November 8, 2012

When most of us think about how much we need to save for retirement, we're focused on housing, food and travel. But how about out-of-pocket health care expenses?

It turns out they will likely be huge. That looming expense is one more reason to pay close attention to how much you're saving in your 401(k) and make sure you're getting fund choices with low expense ratios.

While Medicare kicks in at age 65, there are still premiums, co-payments, deductibles and out-of-pocket expenses that are similar to what you're paying now if you're getting insurance coverage through your employer.

Medicare generally covers only about 60 percent of the cost of health care services, according to the Employee Benefit Research Institute, which recently released the sobering research results.

According to the data, if the spouse and I assume our need for medical care will be about average in retirement, we should plan on saving $163,000 for out-of-pocket health care - and that's if we want to have a 50 percent chance we won't run out of money. If we want to hedge our bets at 90 percent, we need to squirrel away $283,000, according to the nonprofit, nonpartisan institute that conducts research on employee benefits.

And that's just if we assume we will need an average level of medical care. If we estimate that our need for care will be in the 90th percentile - that is, higher than all but 10 percent of the population - we will need to tuck away an extra $387,000 in savings to ensure with 90 percent probability that we won't run out of money.

I think most folks assumed we'd spend more money for health care in retirement. But not that much.

Medicare was never intended to pick up all the costs, said Paul Fronstin, director of the health research program for EBRI in Washington.

Seeing the costs

Most people don't realize the out-of-pocket costs until they help their parents navigate the system, he said. They see the co-payments when one of their parents winds up in the hospital.

For the study, Fronstin calculated the costs by assuming everyone has a Medigap policy for expenses not covered by traditional Medicare. Prescription drugs is the wildcard. If someone starts retirement at the 50th percentile in drug use, Fronstin assumes the retiree will stay in the 50th percentile throughout retirement.

Keep in mind that retirees don't have to have all the money saved up front, he said. Social Security provides a steady source of income and many retirees are also receiving defined-benefit pension payments. Then there are the 401(k) accounts to pay for some of the costs.

"It's a staggering cost," said Jeff Reeter, managing partner at Northwestern Mutual in Houston, which provides retirement and investment advice to clients.

Tallying it up

It's astonishing, but the calculation of health care expenses hasn't been a big focus in retirement-planning software, said Reeter, who also manages the firm's offices in Austin, San Antonio, College Station and McAllen.

Earlier this fall, Northwestern Mutual came out with new retirement software that includes a range of probabilities of what we need to save to get the kind of retirement we want. Post-retirement health care is a key factor, he said.

"It's a blinding glimpse of the obvious," he said.

Part of the problem is that people aren't saving enough for their retirement needs. That is exacerbated by human resources representatives who recommend that employees should "max out" their 401(k) accounts so they can get the full company match.

But a 6 percent investment - a typical requirement to get a 50 percent match - isn't nearly enough to provide a comfortable retirement, he said. Especially not one that includes enough money for out-of-pocket health care expenses.

Reeter said he reminds clients to make sure they stay heathy, eat well and exercise. That - along with making sure they're putting aside enough retirement funds - will help to make sure they have enough to get them through their later years.